I honestly dont know how an engine rebuild works, do they replace every part? If so what parts?

 

Basically, overhauling the engine and making sure everything is in good condition for it to run properly.

It involves checking any wear & tear parts for excessive wear, and replacing any out-of-spec parts, or just replacing all the wear & tear parts all together to avoid the hassle of having to check them. And, any hard/expensive-to-replace items are refreshed or reconditioned (ie: cylinder bores are honed or overbored, and valve seats can be recut).

The Helm's Service Manuals give you a full run-down of what to check for and what to replace. It's quite a bit to explain all the checks and replacement items.

The checks require the following measuring tools:
.micrometer - outside diameters (ie: piston skirt diameter)
.feeler gauges - for end gap and valve stem-to-rocker arm clearance
.universal dial gauge - for run-out and end play
.cylinder bore dial gauge - for measuring out-of-roundness and bore diameter (sometimes combinable with the universal dial gauge if the dial gauge is made to be able to read that high)